California Insurers Lose a Big Court Case In the Health Insurance Policy Rescission Controversy

Here's one for a Harvard Business School case study: A few months before voters in the state are going to decide the future of your industry get into a losing battle about retroactively canceling sick peoples' health insurance policies.

A unanimous California Appeals Court decision has decided that California health insurers have a responsibility to check the accuracy of applications for health insurance coverage before issuing policies at the time coverage is purchased and cannot cancel a policy unless the applicant "willfully misrepresented" their health status.

For the past year, California has had a simmering health policy rescission controversy as many of the state's insurers have argued that they can cancel a health insurance policy if there is any misstatement of fact--even if it is unintentional or immaterial to a claim that is later filed.

The court ruling is a big win for state regulators that have been trying to change insurance company policy and for consumers and their trial lawyers that have been going after them.

As I have commented before, the insurance companies behavior on this issue makes no sense to me and couldn't have been anything other than a big losing issue at a time when health care reform is at the top of the voter's agenda--especially in California.

Certainly, a policy should be voided by fraud. But that was never the issue--it was whether a policy could be voided even if the misstatement was unintentional or immaterial.

The particular case has to do with a Blue Shield policy that was issued for a family who later had a major health claim. Information about the claimants weight and an emergency room visit was allegedly incorrect.

The court went on, "These facts raise the specter that Blue Shield does not immediately rescind health care contracts upon learning of potential grounds for rescission, but waits until after the claims submitted under that contract exceed the monthly premiums being collected."

A health plan, "may not adopt a 'wait and see' attitude after learning of facts justifying rescission." The court said health insurers cannot continue to "collect premiums while keeping open its rescission option if the subscriber later experiences a serious accident or illness that generates large medical expenses."

The issue will now go to trial over whether the family intended to deceive the insurer and whether the insurer acted in bad faith by "blindly" accepting their application and taking their premiums until the claimants medical bills got too high.

Because of this ruling in California, these disputes can go to court on terms more favorable to the claimants.

Nice going California health insurance industry.

LA Times: "Court curbs insurers' ability to rescind medical policies"

Earlier posts:

Report: "Health Insurer Tied Bonuses to Dropping Sick Policyholders"

California Policy Cancellation Scandal Heats Up As Republican Candidates Propose Health Reform Based On An Individual Health Insurance System